Why BOJ’s Small Tweak to Bond Yields Was a Bombshell : Business


The Bank of Japan’s tactic of buying government bonds to cap interest rates on longer-term debt has been a pillar of its effort to suppress borrowing costs and stimulate the economy. On Dec. 20, the bank adjusted the policy, known as yield curve control, allowing long-term yields to rise more. The move blindsided investors, sent the yen soaring and stoked speculation that the country’s policymakers may be preparing to align with other major economies by allowing rates to climb further. 

1. What’s a yield curve?

Bond yields are an expression, in annual percentage terms, of the rate of return you expect to get on a particular fixed-income security. And the gap between yields on different maturity instruments is known as a yield curve. Most of the time, investors demand higher returns for locking away their money for longer periods, with the greater uncertainty that brings. So yield curves usually slope upward. 

2. What’s the point of yield curve control?

The policy, introduced in 2016, was aimed at keeping yields very low to encourage consumers to spend and businesses to invest, and to head off the risk of deflation that could destabilize the economy and make it harder for the government and large companies to pay off their towering debts. More recently, however, the appearance of negative interest rates had the effect of flattening the yield curve. 

3. What’s wrong with that? 

It led investors to doubt the credibility of the BOJ’s ultra-loose rate policy. A flatter curve generally signals caution about a country’s growth prospects. It can also cancel out the stimulating effect of lower rates as it hammers the profitability of commercial banks and makes them more reluctant to lend. If the curve inverts — such as when 10-year yields fall below three-month ones — an economy may be heading into a recession. 

4. So what did the BOJ do?

It decided to allow 10-year yields to rise to around 0.5%, up from a previous limit of 0.25%, while keeping both short- and long-term benchmark interest rates unchanged. BOJ Governor Haruhiko Kuroda said the decision was aimed at improving the functioning of the market. The bank also signaled it wanted to create the conditions for higher yields on long-term debt. However, Kuroda pushed back against the idea that the BOJ was shifting toward the rate-tightening policies being pursued by the US Federal Reserve, which this year has raised its benchmark rate from near zero to more than 4%, and other big central banks.  

5. How significant is it? 

Kuroda spearheaded the most ambitious monetary stimulus program of modern times, with measures that have turned the bank into the largest owner of stocks and government bonds in Japan and made it the last major anchor of ultra-low interest rates in the world. The policy has failed to boost the world’s third-largest economy in a sustainable way. It’s also undermined the value of the yen, sending inflation toward a four-decade high. That’s contributed to a sharp decline in popularity for Prime Minister Fumio Kishida. Furthermore, there were signs that Japan’s debt market, the world’s second-largest, was no longer functioning as it should: With more than half of government bonds now the property of the central bank, trading in what should be an easily-available asset has thinned. After Kuroda widened the yield band, economists and investors said they expected the BOJ to take further steps to allow higher bond yields in the coming months.  

6. Is this the beginning of the end of Japan’s easy-money era? 

Kuroda says it isn’t, but he is only in the job for another three and a half months or so. The December policy shift may make it easier for his successor to move in either direction once they take office. The front-runners are current Deputy Governor Masayoshi Amamiya and former Deputy Governor Hiroshi Nakaso. Amamiya is widely regarded as the architect of yield curve control and of Kuroda’s early “shock and awe” campaign of massive bond purchases. He is seen as hewing closer to existing policy than Nakaso, who has spoken of the limits of prolonging the BOJ’s ultra-loose monetary policy.

7. What does it all mean for the yen?

The currency was the key pain point for the government in 2022. Even after a 4% surge following the relaxation of yield curve control, the yen was set for its biggest annual drop since 2013, when Kuroda started the BOJ’s mass bond buying. Bearish yen trades that were all the rage for much of the year looked under threat. Japanese bond investors could sell more of their overseas holdings and bring the money back home if local interest rates move higher, giving a further boost to the yen.

–With assistance from Masaki Kondo and John O’Neil.

More stories like this are available on bloomberg.com

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